New bulk warehouse construction in Nashville market may slow down

Brokers expect quiet year for new construction

Mar. 18, 2014

Workers examine a section of the inventory area at the new 240,000-square-foot Hollister Incorporated facility warehouse in Mt. Juliet. The medical manufacturer is relocating from Brick Church Pike in Nashville to Beckwith Farms in Mt. Juliet. / Mark Zaleski / The Tennessean

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Hollister North American and ALMA Logistics Manager Jeff Nelson, left, jokes with electrical superintendent Dexton Eller at the Beckwith Farms site, where Hollister has more than doubled its space. / Mark Zaleski / The Tennessean

Steve Preston

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After leasing out 2.5 million square feet of warehouse space and selling its Nashville portfolio in two deals worth $80 million last year, Panattoni Development Co. is gearing up to build again with grading to start soon on a site it just purchased in La Vergne.

But with roughly 1.7 million square feet of warehouse space coming back on the market due in part to relocation by several of those tenants, brokers that track bulk industrial space in the region expect 2014 to be a quiet year for new, speculative construction.

“With more inventory, we’re going to have downward pressures now on rents,” said Steve Preston, a senior vice president with CBRE in Nashville. “Rental rates right now have got to increase 33 to 40 percent before we see speculative construction because you’ve got to be able to rent it at a rent that will be higher than where the market is today.”

Preston’s year-end 2013 industrial market overview report showed Nashville’s market on target to absorb 1.7 million square feet of bulk warehouse space this year with the vacancy rate expected to drop about 6 percent. However, given the costs to develop a 500,000-square-foot building, lease rates now in the $2.80-$3 per square foot range would need to near the $3.87 a square foot range, and vacancy drop to the 12 percent to 14 percent range from 19.17 percent today before return of speculative development.

“Given all factors, I predict spec development in 2015,” Preston said in his report.

Whitfield Hamilton, Panattoni’s Nashville-based regional partner, however, sees a high likelihood of the nation’s largest industrial developer starting this year to build on the 108-acre site it bought at CentrePointe Distribution Park. Hamilton said Panattoni could build one 600,000-square-foot warehouse that’s expandable to 1.3 million square feet, but he doesn’t see many other new buildings beyond that added to the market this year.

One reason Hamilton is optimistic about a speculative building by Panattoni is that the Nashville market has few available warehouses with more than 500,000 square feet of space under one roof.

“You’ve got the market tightening for larger space of 500,000 and up and smaller spaces 50,000 to 125,000,” he said, adding two of the buildings adding inventory to the market have between 200,000 and 250,000 square feet of space and another two have between 400,000 and 450,000 square feet.

Those include the two Nashville International Airport-area buildings Ceva Logistics left to consolidate operations at a 706,500-square-foot warehouse Panattoni built for the vendor for computer maker Dell at the Beckwith Farms industrial park in Mt. Juliet. In addition Panattoni built a 240,000-square-foot warehouse at Beckwith Farms for health care products maker Hollister, which has moved there from 100,000 square feet of warehouse space off Nashville’s Brick Church Pike. That’s adding to the overall vacancy.

In addition Starbucks left about 447,508 square feet of space at Midsouth Logistec II in La Vergne for a new built-to-suit warehouse with nearly 700,000 square feet of space Duke Realty built at the southeastern corner of Central Pike and State Route 840 in Wilson County. Another 403,750 square feet of space also previously occupied by Ceva is vacant at Eastgate One in Lebanon.

Buist Richardson, a broker at Cushman & Wakefield|Cornerstone in Nashville, doesn’t think the market is back to where it can support new building from a development standpoint, but sees it almost there from a demand standpoint. With only one option today for 600,000 square feet of space and few options for space less than 100,000 square feet, he sees why developers such as Panattoni would be getting sites prepared for building.

“That’s kind of our bread and butter in terms of what moves the market the most — we’re more service-oriented,” he said about space less than 100,000 square feet that typically sees demand pick up first coming out of recession before larger-size space.

Preston see e-commerce companies that are among the biggest users of bulk industrial space in the Nashville area as prime candidates for filling some of the vacant space.

“Nashville is in a very good market and location for e-commerce,” he added, citing e-fulfillment operations the likes of Amazon.com added here in recent years as an example.